Universal Basic Income in India

Context:

The International Monetary Fund (IMF) has added its bit to the ongoing debate on Universal Basic Income in India.

Universal basic income:

Universal basic income (UBI) is a model for providing all citizens of a country or other geographic area with a given sum of money, regardless of their income, resources or employment status. The purpose of the UBI is to prevent or reduce poverty and increase equality among citizens.

Universal Basic Income is seen by many as an alternative to the existing system of subsidies, which is often associated with systemic inefficiencies.

Idea of UBI in India:

The erstwhile Planning Commission had worked on UBI in the early 1960s—it has attracted significant attention in the recent past. A large proportion of the population in India still lives below the poverty line and a number of government programmes providing subsidies and support to the poor are marred by inefficiencies. There are leakages in the system, and often, people who actually need government support are left out. Therefore, it is argued that Universal Basic Income will overcome these problems by providing a basic income to all citizens.

A chapter in the 2016-17 Economic Survey argued that Universal Basic Income is more feasible in a country like India, where it can be pegged at relatively low levels of income but still yield immense welfare gains.

Is Universal Basic Income the best way to eradicate poverty in India?

Lifting people out of poverty is a worthy goal and, despite considerable progress, India has not been able to attain desired results in this area. However, there are strong economic and political reasons why India cannot opt for Universal Basic Income, at least in the present circumstances.

Fiscal capacity –The biggest issue is that India doesn’t have the fiscal capacity to implement Universal Basic Income. For example, the Economic Survey calculations showed that a 75% universality rate with an annual Universal Basic Income of Rs7,620 per year at 2016-17 prices will cost about 5% of the GDP.

Universal Basic Income can create distortions in the labour market. A steady, permanent and guaranteed income without any work is likely to affect labour mobility and participation. It is also likely to increase wages, as has been witnessed after the implementation of the Mahatma Gandhi National Rural Employment Guarantee Act. Higher wages without a commensurate increase in productivity will affect India’s competitiveness. This could also have longer-term implications in terms of higher inflation and lower growth. The distortions in the labour market will, of course, depend on the amount of Universal Basic Income.

The nature of Indian politics can create complications. It is highly likely that political parties, in order to improve their chances in elections, would want to increase the amount of Universal Basic Income or try to bring back subsidies in some form or the other, which will have fiscal implications. To be sure, India still has to prove that it can actually run balanced budgets for an extended period. The political class always has this temptation to declare premature victories and give away fiscal gains.

What is needed?

India needs rationalization of subsidies, better targeting and operational efficiency. It needs to move to cash transfers at an accelerated pace with the use of Jan-Dhan, Aadhaar and mobile. This will help reduce costs and spare resources for capital spending to augment growth.

As history has shown, the best way to pull people out of poverty is sustained higher growth. Therefore, rather than creating permanent doles like Universal Basic Income for the entire population, which will be impossible to reverse in the future, the idea should be to save costs with better targeting. This will help create the necessary conditions for higher growth which will decisively lift people out of poverty.

SOURCE: LiveMint

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